Black Tuesday? Update

Monday night update: The news from Asia is not encouraging -- Asian stock markets were sharply lower Tuesday, continuing Monday's near-panic selling;  Japan's Nikkei 225-share index was down 4.6% in midafternoon trading Tuesday in Tokyo, following a 3.9% slide Monday.

(Resume previous post) Good morning. The global stock market sell-off is a story worth tracking, as the U.S. housing slump slowly but surely does damage to investors and economies across the world. Who knew that liar loans and serial refis would end so badly? (I know, I know, you knew). Single-day losses of 5% to 7% in global markets (6.8% in France, 7.2% in Germany, 5.5% in Hong Kong) are eye-opening.

U.S. markets, of course, are closed for the King holiday, but futures trading today indicates Tuesday could be very ugly on Wall Street. From Reuters: "Dow Jones industrial average futures dropped 546 points or 4.5 percent. Should the Dow close lower on Tuesday by the amount the futures suggest, it would rank as the fourth-largest point loss ever for the index."

I'm guessing the Federal Reserve will say or do something before the markets open Tuesday in hopes of injecting a glimmer of confidence, or liquidity into the picture.

Your thoughts? Comments? Email story tips to peter.viles@latimes.com.
Photo Credit: AP

Comments

[Tombstone Realty]

Actually, I knew the housing bubble was going to burst at some point. However, I had *no* idea we were foisting these bad loans in bizarre little Trojan Securities all around the world.

I guess all this talk by analysts about Europe/China no longer being "coupled" to the American market was a bit of an overstatement.

NIce picture. His hair matches the DAX index. His hair will probably be matching his shirt by the end of the week.

[Nidhi]

I hope so too; hope that Bernanke/Paulson will say few things to soothe the concern in the market. All markets, including Emerging markets took a big tumble in the order of 5-7%. The Bush Package is not well received either.

[Cal]

This looks like a response to the monoline insurers going to get downgraded. A lot of people are counting on that AAA rating illusion being maintained.

Rate cut tmw is a possibility, even though it wont help the issue at hand it might help calm the market.

[Disgusted]

I can't imagine the nail-biting going on with investors. Tomorrow's opening/closing must feel like a big money version of, "Wait 'til your father gets home."

The only thing worse than taking a beating in the housing market must be the roller-coaster ride of the stock market. Or getting hit with huge losses in both.

[Michael Snyder]

It's been said,"When America sneezes, the world catches a cold." and today's the proof of that. Personally I'm tired of hearing about how the housing market is somehow the only cause of this. With 20/20 hindsight it's reasonable to trace the collapse of the CDO pyramid to the point in 2004-05 when "creative financing" became the norm instead of the exception. This was a clear indicator of a cash starved pyramid looking to expand it's market base. Please note I said hindsight...
The real "subprime" problem lies with the CDOs these mortgages were packaged into and sold, and resold with no direct line of accountability. Now I'm a pretty simple man, but I have more sense than to invest in an instrument allegedly secured by real property, yet nobody in the chain can tell me what property(s) will actually secure my investment. Sounds a lot like, "Congratulations! You've won the Nigerian Lottery and all you have to do to collect is..." Add to that the manner in which these "devices" were leveraged and it's no surprise the people at the top were desperate to avoid the inevitable short calls that have shattered profits in the financial sector. Now GWB's come up with a "bail-out" plan amount that nearly mirrors the "subprime write downs" in the financial sector and he and the Democrats are going to argue about the size of the pittance the government will "rebate consumers" to stimulate the economy. What worries me is what's being slipped into the "plan" while Pellozi, GWB & the candidates argue for the cameras.
As for tomorrow; remove all sharp objects from your desk and bar the door. The only thing more over-valued than Inland Empire real estate has been much of the stock market.
Not to sound like a broken rec, broken rec, broken record; but until personal accountability and cooperate transparency are returned to the market, it's gonna be nothing but ugly. Warren Buffet was able to step into the Lincoln Savings debacle and restore a level of confidence that allowed the market to heal itself. Who are we gonna call now?

[Bob]

Does the USA have anything like this?

http://www.propertysnake.co.uk/

Background here -
http://www.telegraph.co.uk/property/main.
jhtml?xml=/property/2008/01/19/pjanuary119.xml

Would be a lot more fun.

[travelingman]

It's been pointed out that bubble was going to burst...reading this blog and others really gives good overall insight to the market and some of the crazy dynamics going on

however, the US is one of the largest institutional investors that invests significantly in foreign markets. On MLK day with the US not investing, that's going to take a toll...the markets aren't decoupled (yet) on american influence

throw in fear of the recession, these hits aren't surprising

[bottom line]

Recommended viewing for tonight is "Rollover", with Jane and Kris and a bravura performance by Hume. See if you can make it all the way through to the end, LOL. Make sure not to choke on a pretzel.

[MyLessThanPrimeBeef]

MichaelSnyner, who are we going to call on now?

Well, the people who have the wherewithal, they have a saying, 'When the dhou (or dhow) is sinking, you pray for the flying rugs to arrive.'

(OK, I admit, I made that up).

Alibaba, rub the latern harder, please.

As for the commander in chief's plan, by the way, we need to have a constitutional amendment that make the POTUS the spender-in-chief as well as the suspenders-in-chief if only we are not so sartorially challenged, anyway, as for the plan, I am afraid most people are going to squander it on lead toys that will only exacerbate the trade deficit. I will go along with the president if it is coupled with a patriotic plan to encourage people to buy more, or buy into, American products...like M1-Abrams tanks equipped with titanium tipped shells - I am pretty sure these toys are made in the USA.

[Theorist]

Hang on to yer diapies babies, we're goin' in.

We've all learned how everyone was bad and greedy and naive, and we've learned fancy new terms like "CDO's" and "write-downs" -- but now ladies and gentleman we enter the wild and wooly global world of "credit default swaps," estimated to be a $30 TRILLION market -- all built on thin air.

http://en.wikipedia.org/wiki/Credit_default_swap

[lefty]

if you're out of stocks now, what better place to put your money than your own beautiful home in sunny CA!! you'll be building equity in no time while the snow-bound east coast is getting even colder on wall street! and metro L.A. is the place they want to be!!

[Laker]

Spending our way out will not work same as if you have a maxed out credit card, calling the bank for credit line increase to save you...
However, if the government sends everybody a $800 deposited in a 401K/IRA fund, that will do it. 1) The banks and investment companies will get $140 Bill to ease of the liquidity. 2) Every tax payer will get a boost to his retirement account. (For some that will be a great start and an incentive to save)
Since the money will be invested, it will be 100% productive.
Spending the money on bills/gas/restaurants will not stimulate nothing. If you want to buy something to stimulate things maybe try viagra/cialis/etc.

[Michael Snyder]

You gotta love "lefty"...

Our very own glimmer of light at the end of the tunnel...

[taylor1042]

i highly recommend that anyone who wants to understand what is going on take a look at an interesting book called "The Hungry Years". it details the collective mania that transpired in the US during the period from 1926-1929.

even after the crash in 1929, policy makers and persons of influence were giving speeches about how the issues on wall street wouldn't affect the real economy, about how the worst was over, etc.

3 years later nominal GDP had contracted by 35%. the collapse in real GDP was even lower, since the CPI collapsed as economic activity ground to a halt.

a t-bill yielding 2.5% is a fantastic investment in a world where deflation is running at 2-3% per year.

[MyLessThanPrimeBeef]

Taylor, this is the thing about depression - The Fundamental Law of Alchemy applies, which states that one cannot transmute recessions into goldilocks. One can only merely postpone them.

Secondly, the First Law of the Physics of Recession, a.k.a. Conservation of Recession, clearly implies that if we merely postpone a recession after another, they will eventually come back and add up to be one giant depression or hyper-inflation, the latter was the case in the 70's.

Alas, Alan al-Wallstreet Greedspan didn't not possess knowledge this simple, yet profound. He mistakenly thought, with the aid and power of his Stone of Thick Gibberish, he could acquire the mythical Goldilock from dross matters like a recession. I am afraid Uncle Bin Lackey is in lockstep with his clueless predecessor, trying to interfere with Nature's 'Creative Destruction,' as pointed out by Schoemaker.

[Uncle Billy]

Not sure if Pete already posted this January message from Bill Gross of Pimco, who regularly explains the dangers of the "Shadow Banking System."

http://tinyurl.com/2mmw3z

He puts "outstanding credit default swaps" (CDS) at $45 TRILLION, which is: "more than half the size of the entire asset base of the global banking system." He puts the entire derivates market at over $500 TRILLION. This is the true pyramid, the true house of cards.

I did a fannie mae loan for an apartment building last year (brokered it). Fannie Mae works with certain approved lenders on these, which are just prepping the loan, really, for sale to wall street. The rate, let's say, was fixed, and based on the 10 year treasury, plus a pad, or spread, of say, 85 basis points (1%). Easy enuf, right? The final rate, however was heavily dependant on what the swap rate was at the time of loan lock.

New to swap rates, I asked the lender rep to explain. He did not. Either could not, or would not. She mentioned that she had been a bond trader before going into commercial RE lending, and that swaps were important in determining interest rates on these loans. I pressed her to explain how it works, and came away convinced, that in fact, she did not understand how it works -- only that it was a form of insurance built into the loan.

The CDS concept goes beyond real estate lending, into every reach of finance. It's huge, and as Warren Buffet pointed out (while doing them himself) -- they're financial weapons of mass destruction.

Bill Gross is no stranger to CDS, and probably understands them better than most, but what is he up to? Can anyone educate us on the relationship between Pimco's "fixed income" investments and the use of CDS? Will he be profiting from a general stock market and credit crash? Bonds have traditionally been a refuge in financial maelstroms... will they be this time as well?

[Theorist]

More on Pimco from our friend wikipedia:

Pimco is owned by Allianz of Germany.

Greenspan was hired as a special consultant by Pimco back in May, 2007.
(msnbc) Remember how he was recently hired as well by one of the few companies (Paulson & Co.) that made money on the mortgage meltdown by purportedly assiduously combing the markets to find a ripe bubble, and then exploiting it?

Weird aside: Allianz goes back to the late 1800's. They were according to some reports, the insurer of the Auschwitz concentration camp, and provided financial services to the Nazis.

[Robert in Palm Springs]

This severe drop in stock markets around the world is not at all surprising. At long last people are starting to realize the extent of leverage in the world economy. Of course, the USA, Great Britain and Australia went the greatest extremes, but other countries such as Spain, Greece and Turkey are also highly leveraged. No country is going to escape the coming Depression, although some will fare much better than others.

Moreover, there is no relief in sight. Look for the Dow under 10,000 by the end of the year. When the stock market and bond market really colllapse, the real estate market will collapse as well. Cash will be king.

The sad thing is that it was all preventable. We were warned more than once by the Bank of International Settlements, the Austrian school of economics and a few economists in America (i.e. Paul Volker) that this would happen if we followed Greenspan's mythological Virtuous Circle school of economics. Now we will pay the price and will pay for years to come. Unfortunately, we deserve no sympathy because it was our own greed that did us in, much like Rome.

[Martin]

To all of you who were happy as can be watching housing prices decline since last April:

Congratulations! It's happening. Houses will go lower than, likely, the cost to build them -- unless, of course, the cost of labor also sinks to contemporary lows.

And there goes our national economy ... stock markets globally ... and millions of other lives that are interdependent on economic prosperity globally.

But, hey, you got what you wished for. And some are still so smug about optimists like Lefty. What more do you want?

I haven't the foggiest idea of how to fix this mess. Maybe somebody here can intelligently articulate about some solutions. And if anyone here says we should just let the real estate market correct itself naturally, I'll bang my head on my desk while shouting for the second year in a row that "they don't get it!" We can't risk a full scale economic depression so that people who live in traditionally expensive cities can afford a house.

[Tombstone Realty]

oMg, I so want Lefty's autograph.

[Roger Moore]

"But, hey, you got what you wished for." --Martin

It didn't happen because people wanted it. It happened because housing prices were unsustainable. It makes no more sense to blame the crash on people predicting the housing market's drop than it would to blame Ralph Nader for people who were injured in unsafe cars. The people to blame are the ones who built the unsustainable housing market in the first place.

[Uncle Billy]

Martin: Check out Cramer's solution on cnbc.com. He advocates for the government nationalizing the mortgage insurers. Warren Buffett seems to be taking care of the bond insurance issue. Pimco would have us buy bonds, I believe.

In regards to Los Angeles real estate (any real estate), which presidential candidate will be best? Who will let us float home prices down to realistic levels while preserving employment?

Side note: Cnn just reported that Bill Clinton was believed to be America's first "African American President." (credit to Toni Morrison) This just confirms my belief that we are *all* African American. If the theory is true that we descend from a small group of hairy people that left Africa 50,000 years ago -- and many that left later -- then we are all just as "African American" as those who call themselves African American publicly. Full Disclosure: I am African American. Hint: This also means that "Latinos" and "Asians" and everybuddy else is African American.

Race has become a large issue in this election, and race plays a role in Los Angeles real estate, so perhaps it's worth thinking about.

[H]

With the economy going down the tubes, we are still spending 3 billion a week of borrowed money in Iraq.

[Victor the Predictor]

Many eyes on the rest of the world until our own markets open up in the morning. Calculated Risk reports that the Indian exchanges dropped 10%, triggering the circuit breakers.

I have no predictions today.

[arroyogrande]

"We can't risk a full scale economic depression"

Yes, by all means, keep people spending more than they make, keep extending credit to them so they can buy more toys to keep the economy going, keep extending the payback period so that we can keep the American citiz---err, I mean CONSUMER buying buying buying. In fact, target a government hand-out specifically to spenders and call it a "stimulus package", so maybe, just maybe, spenders will think everything is all right and keep on spending.

What Martin doesn't understand is that when you condition people with the notion that spending your entire paycheck and taking out bigger and bigger loans is normal, commendable, and financially astute, the economy you get is not stable. What you get is an economy that requires you to keep people spending, and punish them for saving just to keep the economy's head out of water.

Well, you can't fool people forever...there comes a time when they realize that *forever* spending themselves into massive debt is not only undesirable and unreasonable, but also impossible. Refusing to save for a rainy day doesn't stop the rainy days from coming.

It was always a house of cards...and forcefully adding more cards won't make it any more stable.

- arroyogrande

[Michael Snyder]

I'm a bit blown away by the Fed's act of desperation. Sadly it will likely be seen as just that on an international scale and probably have a negative effect on the stock market.
Anyone who's ever faced down a schoolyard bully knows you can't let him see you sweat, and for cryin' out loud, don't blink! This looks like Bernanke's panicking and grabbing for his best punch while he's hiding under his desk. (Figuratively speaking of course.)
In making this move the Fed has in essence capitulated and tacitly admitted what's been obvious to everyone on this blog for a year. Call it whatever you want, we're in deep Bandini and it's going to take more than a printing press to get us out of it.
On the up side, oil is under $90 and falling and the Chinese are feeling the pinch too. Mortgage rates are expected to follow the Fed but with no incentive to save, the market will be restricted to those with sufficient equity to make their down payment. Now if comps will just stabilize long enough to close a loan, "lefty" will be able to sell that house.

[Dr. JwB]

Ouch! Something just hit me in the head. Whatever it is, it's light blue and seemed to come out of nowhere from above.